Case Law Summaries

Pine Bush Equipment Co. Inc. v. Academy Auto Recyclers, Inc.

• Opinion Date: July 12, 2001
• Business Law
• E-Mail

UCC—Either expiration of a filed financing statement or a good faith purchase of equipment from a dealer in such equipment relieves the buyer of a secured party’s lien.

A dealer sold a piece of equipment to a customer who financed the purchase through a credit company. The credit company perfected a security interest in the equipment by filing appropriate UCC-1 financing statements. About two years later, the buyer defaulted on the installment sales contract and the credit company assigned its perfected security interest to the dealer. The assignments were filed in the appropriate offices. Thus, based on the buyer’s default and credit company’s assignment, the dealer became the owner of the equipment. “However, by then, the whereabouts of the equipment was unknown.” About seven years later, the dealer learned that another company had possession of the equipment. It demanded possession and when that demand was refused, the dealer instituted suit against the new owner, seeking a writ of replevin and damages. The then-owner of the equipment answered and alleged that it had purchased the equipment even before the original buyer’s default and that purchase was through a licensed dealer. It also maintained that at the time it purchased the equipment, “there was no basis for it believe that the equipment was financed.” Over the next nine years, the then-owner possessed the equipment, purchased parts for it, and made repairs to it. The lower court ruled in favor of the then-owner of the equipment and the Appellate Division affirmed. The lower court’s analysis was as follows. The original UCC filings were in force when the new owner took over the equipment. The new owner had open and continuous use and possession of the equipment for nine years before the suit was filed. It paid substantial sums of money to repair the equipment. The original dealer said it had no idea where the equipment was from the time it was originally sold until it filed suit, but the Court rejected that because the testimony was inconsistent with other facts before the lower court and, in fact, the lower court thought that the dealer could have found the equipment if it wanted to do so. Further, the original dealer allowed a great deal of time to elapse, giving support to the new owner’s application to dismiss the action pursuant to the statute of limitations. Further, the original buyer sold the equipment through a used vehicle and equipment dealer. That dealer sold it to the ultimate owner. The later transaction transferred good title to the equipment pursuant to the express language of N.J.S. 12A:9-30(4). Also, the original financing statement expired in 1994 and was never renewed. Therefore, according to N.J.S. 12A:9-403(2), the lapse of a perfected security interest causes the secured party to become an unsecured party “from the beginning of the loan or from the time that the purchaser takes possession for value of the equipment.” Consequently, after the expiration of five years and through the time of suit, the dealer did not have a perfected lien on the equipment. Such a defect is not curable. Given that the used equipment dealer may have only had voidable title, nevertheless its transfer of the equipment to an innocent third party purchaser (i.e., one who had no knowledge of the problems in the first place) granted good title to the new owner. The original dealer could have upset that argument by showing that the new owner did not pay fair market value for the equipment, but there was nothing on the record to indicate that such a situation could be proved.

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